Four Reasons Why You Should Buy Defense Contractors

Jon Markman
, ContributorAnalyzing tech stocks through the prism of cultural change.Opinions expressed by Forbes Contributors are their own.

War is hell. But investing in war, well, sorry to sound glib, but it's very profitable.

There are only a few companies licensed to make suitable bombs and missiles -- and the ships, aircraft and armored vehicles that carry them. So they have the U.S. Defense Department, and its counterparts overseas, over a barrel when it comes to pricing and margins.

US Vice President Mike Pence addresses US soldiers as he stands next to an F-35A fighter jet at Yokota Air Base at Fussa near Tokyo on February 8, 2018. Pence is on the last day of a three-day trip to Tokyo before leading a US delegation to the opening ceremony of the politically tinged Pyeongchang 2018 Winger Olympic Games on February 9. (TORU YAMANAKA/AFP/Getty Images)

Most industrial sectors were trashed in late January and early February. Selling was nearly indiscriminate. In the big picture, though, defense stocks barely budged, and are now sniffing new all-time highs already.

It is as if this investment sector plays by a different set of rules. In the post-9/11 world of fear and security, it should.

Defense spending has become a sacred cow. Neither U.S. political party can afford to appear anti-military. And decades removed from the Vietnam War, support for the troops is right up there with apple pie and baseball.

That support is not a bad thing. Far from it. Those who risk life and limb to protect the country deserve our thanks and broad support. They also deserve better pay and care after they return from active tours of duty.

Most military spending does not support the troops, however. It mostly helps the companies that make costly weapons of war.

And there is no end in sight to the budget increases.

Despite growing inflation fears and rising interest rates due to ballooning budget deficits, there is not even a whisper about curtailing Pentagon support. Democrats and Republicans disagree about almost everything except military spending. Last week, they agreed to $165 billion in additional funds for the Defense Department.

The extra money fully funds the National Defense Authorization Act, a $700 billion package passed by the Senate last September on an 89-8 vote. Of that figure, the Associated Press reports $603 billion will be used for core Pentagon operations like missile defense, machinery, and buildings. Only $71 billion will be used to fund the troops stationed at home and abroad.

In 2019, the Pentagon budget will rise again, to $719 billion. By way of comparison, the budget was $345 billion in 2002.

Keep in mind, an internal audit by Ernst & Young for fiscal 2017 found the Pentagon’s Defense Logistics Agency could not account for $800 million in construction projects. The L.A. Times reported that, of the 63 largest Pentagon programs, 50 are over budget by $296 billion in aggregate.

As a taxpayer, you should be miffed. As an investor, there is a lot to like.

A flush Pentagon, with very little oversight, is excellent for sales visibility. There is every indication the U.S. government will begin making significant longer-term commitments to rebuild aging military equipment and missile and data analytics systems.

Better still, for investors, there is not a great deal of competition among defense contractors …